Wednesday, July 1, 2015

Albania holds rate, ready to act on any Greece impact

Albania's central bank maintained its key interest rate at 2.0 percent and said it was carefully assessing any scenario that may arise in connection with the situation in Greece and is "ready to undertake all necessary measures to comply with our objective of price stability."
The Bank of Albania, which cut its rate by 25 basis points in January after cuts of 75 points in 2014, said the solution to the public debt crises in Greece will to a large extent determine the external economic and financial environment that it will face, and the country's economy and financial system had a low exposure to Greece and is resilient to possible shocks.
"Nevertheless, the Supervisory Council is carefully assessing any scenario of the Greek crises, which may dictate a revision of our projections," central bank Governor Gent Sejko said.
Albania borders Greece to the south and Macedonia to the east.
Sejko said the current direction and intensity of the central bank's stimulus is considered adequate to comply with its inflation target but the interest rate will still be kept low "for some quarters" due to low inflationary pressures from the cyclical weakness of the economy and low global inflation.
During this year, inflation is expected to range from 1.8 to 2.2 percent and then rise towards the central bank's target of 3.0 percent, plus/minus 1 percentage point, over the next two years.
In May Albania's inflation rate eased to 1.8 percent from 2.3 percent in April.
Albania's economy is expected to improve in the second half of this year and in the next two years as easy monetary policy boosts consumption and investments after a slowdown in the first quarter but economic activity is still expected to remain below potential in 2015.
"A better capacity utilization will drive the rise in wages and employment, and the firm return of inflation to target," Sejko said. In 2014 Albania's economy grew by 1.9 percent.

The Bank of Albania issued the following statement:

"Speech by Gent Sejko, Governor of the Bank of Albania on the Monetary Policy Decision-Making of the Bank of Albania’s Supervisory Council, 1 July 2015

Today, on 1 July 2015, the Supervisory Council of the Bank of Albania decided to keep the key interest rate unchanged at 2.0%.

Let me share with you the underlying reasons and expected consequences relating to this decision.

***

Inflation performing below the target and cyclical weakness of the economy have determined the pursuit of an accommodative monetary policy in recent years.
The Bank of Albania has progressively increased the monetary stimulus, with a view to establishing appropriate financial conditions for boosting aggregate demand and returning inflation to target.
While this policy's outcome resulted in the expected direction, inflation persists below the target and the economic activity remains below potential. The performance of these indicators dictates maintaining the direction and intensity of the monetary stimulus.

Inflation was characterised by an upward trend in the first five months of the year, yet this trend is fragile and inflation remains below the target.

The rate of inflation descended to 1.8% in May. This is in line with our assessments for a temporary effect of supply-side shocks on consumer prices. The fall in food prices in May led to the fall in inflation in this month. In parallel, the fall in global oil prices continue to provide a downward effect on inflation. Other CPI basket items continued to provide low and steady contribution to the increase of domestic inflation.

The performance of inflation continues to reflect low inflationary pressures, arising from both cyclical weakness of the economy and low inflation rates in global markets. These factors are expected to remain present for some quarters ahead.
Inflation is expected to range within 1.8-2.2% interval during 2015, while it is expected to pursue an upward trajectory towards the target over the next two years.

The economy is expected to grow, but growth rates close to the potential will recover gradually and economic activity is expected to remain below the potential during 2015.

Incoming data from the real sector endorse our previous assessments for the slowdown of the economy during the first half of the year. From the production side, economic activity suffered the consequences of floods and fall in global oil prices. From the demand side, economic growth was driven by the improvement of the balance of exchanges of goods and services with abroad, mainly in tourism. Private domestic demand is assessed as weak, although it has made a small positive contribution to economic growth. In particular, private consumption was affected by the payment of electricity bills in arrears. On the other hand, the fiscal policy and indicators continued the consolidation path. Budget deficit was downward until May, whereas public expenditures were slightly up in annual terms.

The accommodative monetary policy stance is reflected in overall downward interest rates, but the response of the economy to better financing conditions remains slow.

The monetary stimulus has been transmitted in financial markets: costs of funding the public and private sectors are currently at their historical low levels. Financial markets operate at good liquidity levels, but the banking sector appears hesitant for financing long-term projects. Moreover, households and businesses show low interest to finance consumption and investments through bank loans. Therefore, lending growth in the first four months of the year was lower than expected. The Bank of Albania expects lending to grow at slow rates in 2015, and faster in the years ahead. Sound balance sheets of the banking system, the programme for the treatment and reduction of non-performing loans, and the expected recovery of credit demand are expected to trigger a faster growth of lending.

Concluding the analysis, the Supervisory Council of the Bank of Albania deems that the incoming information does not alter our expectations for economic and financial developments in the medium term.

The economic slowdown noted in the first quarter is expected to be temporary. Thus, the Supervisory Council did not change its projections on the expected economic developments in the medium term. Economic growth is expected to improve during the second half of 2015 and in the next two years. Stimulating monetary conditions will boost the growth of consumption and investments, hence creating premises for the acceleration of economic growth and the return of the economy to equilibrium. A better capacity utilisation will drive the rise in wages and employment, and the firm return of inflation to target.

In accordance with these projections, the current direction and intensity of the monetary stimulus in the economy is adequate for compliance with the inflation target.

The velocity of the return of inflation to target is assessed as consistent with maintaining economic and financial balances. Based on the available information, the Supervisory Council deems that the firm return of inflation to target will require keeping the interest rate low for some quarters ahead.

The Supervisory Council is closely monitoring the situation in Greece.

The progress of negotiations to find a solution for the public debt crisis in Greece will determine, at a large extent, the external economic and financial environment that the Albanian economy may face. So far, our projections and macroeconomic policies assume a successful finalisation of these negotiations. Furthermore, the Albanian economy and financial system have a low exposure and are resilient to possible shocks. Nevertheless, the Supervisory Council is carefully assessing any scenario of the Greek crisis, which may dictate a revision of our projections.
In any event, we stand ready to undertake all the necessary measures to comply with our objective of price stability."